• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Bruce Kamich
    • Doug Kass
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • TheStreet Smarts
  1. Home
  2. / Investing
  3. / Energy

Drilling Down on a Fracking Small-Cap

GreenHunter Resources still has growing pains, but it's very well positioned.
By JIM COLLINS
Aug 01, 2013 | 06:00 PM EDT
Stocks quotes in this article: GRH

GreenHunter Resources (GRH) operates in an attractive subsector of the hydrofracking industry. The company handles the water produced from the hydraulic fracturing process in a number of different ways. GreenHunter can store it above ground, recycle it for reuse (removing the briny contaminants in the process) or, most simply, send the water back underground in salt water disposal wells. 

It's a great business, but GreenHunter is still in the process of becoming a great company. After a few years of dabbling in other green energy areas, it's strictly in water disposal now, but the growing pains remain. In the first quarter, because of a variety of operational issues, GreenHunter posted negative EBITDA, giving rise to liquidity concerns in the market. I believe those concerns are alleviated by GRH's recent decision to sell two SWD wells in Texas, raising a combined $12.7 million in proceeds.

Also, GreenHunter founder (and Magnum Hunter (MHR) CEO) Gary Evans has a personal (undrawn at last report) $2 million line of credit available for GreenHunter, and since he owns 48% of the shares outstanding, he has a vested interest in GreenHunter's prosperity Much like Magnum Hunter, GreenHunter is using Evans' strategy to de-emphasize Texas gas production and go "all in" on the Marcellus/Utica shale region in Pennsylvania, West Virginia and Ohio.

GreenHunter is in the most attractive shale play. There is a misconception about the strength of the Marcellus shale, a misconception based on rig counts. While it's true that the 78 rigs currently operating in the Marcellus represent a year-over-year decline of 23%, anecdotal evidence shows that production is growing strongly there. Note also that the rig count in the adjacent and overlapping Utica shale formation (which lies directly on top of the Marcellus, geologically speaking) has risen 50% year over year to 36 rigs, and anecdotal evidence is that early production returns (it's a "newer" play than the Marcellus) are phenomenal.

GreenHunter shares fell this week as competitor Nuverra Environmental Solutions (NES) (formerly Heckmann) pre-announced a disappointing second quarter. Nuverra's management blamed most of the shortfall on a slowdown in the Bakken shale, which was hit hard by unusually cold and wet weather in the Dakotas. In fact, Nuverra management described its business in the Marcellus and Utica shale as "stronger than expected" and noted Nuverra is "actively expanding our operations there."

Looking at the drillers and their second-quarter earnings and production releases,

Range Resources (RRC) said it had "continued success ... in the Marcellus shale. Second-quarter production ... exceeded the high-end of company guidance." Cabot Oil and Gas (COG) said, "Our current Marcellus ... production rate represents a 15% sequential increase from our 1Q2013 exit rate ... we have made the decision to bring a sixth Marcellus rig into the field." Seneca, a division of National Fuel Gas (NFG), said, "As a result of better than projected performance of Marcellus shale assets, the company is increasing its 2013 production guidance."

Since GreenHunter has a strong concentration in the Marcellus/Utica shale, it is positioned to serve the most attractive part of the U.S. natural gas market. I believe that attractive positioning will show up in greatly improved financial results for GreenHunter in the third and fourth quarters of this year.

If GreenHunter can surmount its early stage hurdles, I believe the shares could trade above $3 per share, more than double the current price. CEO Jonathan Hoopes has referred to "the $30 million question," i.e., the company's ability to raise funding, likely in the form of an equity injection. Such an investment would "de-risk" GreenHunter's balance sheet and allow the company to consolidate the fragmented frack-water disposal industry.

At Portfolio Guru, we are buying GreenHunter's Series C preferred stock for clients at the current price of $0.73 on the dollar. The preferreds are yielding 13.8% currently, but a meaningful equity injection would, in my opinion, eliminate the large discount to par, another way to realize a capital gain.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Collins' firm owned GRH and GRH-C. 

Please note that due to factors including low market capitalization and/or insufficient public float, we consider GRH and NFG to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

TAGS: Investing | U.S. Equity | Energy

More from Energy

Stay Away From These Types of Stocks, They're Radioactive

Jim Collins
Mar 24, 2023 2:35 PM EDT

Here's what you're better off buying. I certainly have.

Don't Be Lured Into the Nasdaq Trap

Jim Collins
Mar 23, 2023 5:31 PM EDT

Here's why I'm avoid tech stocks and snapping up preferreds.

An Energy Play With Long-Term Upside Potential

Bruce Kamich
Mar 22, 2023 8:20 AM EDT

The charts suggest a big move could unfold.

Bearish Bets: 3 Stocks You Should Consider Shorting This Week

Bob Lang
Mar 19, 2023 10:30 AM EDT

These recently downgraded names are displaying both quantitative and technical deterioration.

Here's Why I'll Have the Last Laugh in This Market

Jim Collins
Mar 17, 2023 3:14 PM EDT

Let's take a journey through time, starting with April Fool's Day, 2021, and see where we've come, and how I've been handling it.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 01:56 PM EDT PETER TCHIR

    Very Cautious

    I am very cautious here. I don't like how the c...
  • 08:58 AM EDT JAMES "REV SHARK" DEPORRE

    This Weekend on Real Money

    How to Adjust Your Trading Style as Market Conditi...
  • 05:00 PM EDT CHRIS VERSACE

    AAP Podcast on the Fed Decision!

    Listen here!
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2023 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login